self-funding and the management of risk · 2017-01-07 · n avoid state premium taxes many states...

Self-Fundingand the

Management of Risk

A Educational Guide

1 Copyright©Spring2016

TABLEOFCONTENTS INTRODUCTION 2

SAVINGSOPPORTUNITIES 4

RISKEXPLAINED 7

TRENDMANAGEMENT 8

MANAGEMENTOFRISK–STOPLOSSINSURANCE 9

AGGREGATESTOPLOSS 9

SPECIFICSTOPLOSS 10

AGGREGATINGSPECIFICSTOPLOSS 10

LASERING 10

WHATISINAWORKINGRATE? 11

ADMINISTRATIVEFEES 11

STOPLOSSPREMIUM 12

PLANDESIGNFLEXIBILITY 12

CLAIMMARGIN 12

OTHERCONSIDERATIONSFOREMPLOYERS 14

USINGCAPTIVESTOMINIMIZEHEALTHCARECOSTS 14

BENEFITSOFACAPTIVE 16

CASHFLOW 16

COMPLIANCE 17

FIDUCIARYRESPONSIBILITY 17

HIPAA 17

CONCLUSION 18

ABOUTSPRING 199

WHAT'SNEXT 20

CONTACTINFORMATION 20


INTRODUCTION

WithnearlyonefifthoftheU.S.economytiedtohealthcare,costscontinuetobeacritical topicofconcern for the economy. U.S. businesses face competitive challenges in a global market, as aburgeoning portion of operating capital is siphoned away to cover employeehealth care costs. It isbecoming increasinglydifficult forU.S.companiestoremaincompetitive inthisglobalmarketwithagrowingportionofthecostofhumancapitalbeingallocatedtohealthcarecosts.ThePatientProtectionandAffordableCareAct(ACA)hasbeen lawnowformorethansixyearsandthe majority of the provisions have been enacted. Since the passage of this act, the federalgovernment has promulgated more than 15,000 pages of regulations outlining the requirements,processes, and mandates on employers, providers, insurance carriers, and others that play in thehealth care arena. This continuous tidalwave of regulation creates a significant compliance liabilitythatgeneratesnewtaxesandfees,andexpandstheadministrativeburdenshoulderedbyemployers.Inlightofthecurrentenvironment,employersareaskingsomeimportantquestionsaboutthefutureoftheirhealthcareofferingsandcontemplatingwhetherornottheyshouldcontinuetoofferhealthinsurance coverage to their employees. Recent surveys indicate that a majority of employers willcontinue to offer health insurance in order to remain competitive. Some employers, however, arereducingemployees’ hours in aneffort to staybelow the30-hourdefinitionof full-timeemployees.Whilethiswillultimatelysavemoney,employersoptingtoeliminate,reduceorrefrainfromofferinghealth insurancewillbeexposedtopenaltiesassociatedwithnotcoveringemployees,offeringplansthatareunaffordable,orfailtomeettheminimumvaluetestortheminimumessentialcoveragetest.Thebottomlineisthatemployersareturningovereverystonetouncoverwaystocontrolcosts.Foranemployerofferingafully-insuredplan,aprimeopportunitytodecreasecostsexistsbyconsideringself-fundingin2014andbeyond.Byself-funding,employerscanachievesavingsofanywherefrom5%to15% depending on their cost structure.We discuss the benefits, considerations, and details of self-fundingbelow.Note to reader: self-funding and self-insurance are referred to interchangeably throughout thedocumentandshouldbeconsideredthesamething.


Anunderstandingofafewkeytermsisessentialandwillaidinthedescriptionoftheconceptsoutlinedbelow.

KeyTerms Definition

Fully-InsuredPlan

Anemployercontractswithaninsurancecompanytoassumetheriskandfinancialresponsibilityforemployees’healthcareclaims.Theinsurer’sresponsibilitiesincludeprocessingandpayingmedicalclaimsaccordingtotheplanofbenefits,maintainingaprovidernetwork,andotheradministrativetasks.Theinsurersprofitisbuiltintothepremiumcosts.

Self-InsuredPlan(Self-funded)

Anemployerretainsthefinancialriskofcoveringemployees’healthcarecosts.Contractingwithathird-partypayer,administrativeservicesorganization,oraninsurancecompany,anemployerwillpayathirdpartytoadministerthebenefits,payclaims,andperformcertainlimitedfiduciaryfunctions.

AdministrativeFee

Aperemployeepermonthfeethataself-fundedemployerspaysthebenefitsadministratortoprocessandpayclaims,maintaintheprovidernetwork,andperformothercontractedfunctionsthatcouldincludediseasemanagement,wellness,utilizationreview,andcasemanagement.

RetentionFeeAfeeincludedinthemonthlypremiumthatischargedbyafully-insuredhealthplantoclientstocoverthecostofmarketing,retainingbusiness,andsometimesincludesprofit.

StopLossOftenreferredtoascatastrophicinsurance,stoplossinsurancecoverslargeclaimcoststhatexceedacertainthresholdsetbytheself-fundedemployer.Therearetwokindsofstoplosspolicies:specificandaggregate.

Specific(Individual)StopLossCoverage

Paysoutifanindividualclaimexceedssomethresholdamount,typicallyanywherefrom$20,000to$500,000.

AggregateStopLossCoverage

Paysoutiftheaggregateemployercostsexceedsomepercentageofexpectedclaims(typically125%,butthiscouldbemoreorlessdependingonthepolicy.)

LaseringApracticeinwhichthestoplossinsurerwillexcludefromstoplosscoverageahighcostclaimantoraparticipantwithaspecificmedicalconditioninordertocontinuetoinsuretherestofthebusiness.

AttachmentPointThedeductibleamountthataclaimmustreachbeforeitcanbepaidbythestoplosscarrier(typicaldeductiblescanrangefrom$20,000to$500,000).Thiscanalsobereferredtoastheself-insuredretentionamountorSIR.


SAVINGSOPPORTUNITIESTherearemanybenefitstoself-fundingincludingplandesignflexibility,costtransparency,andsavings.Self-fundedemployershavemuchmoreflexibilityintheirplandesignthaninsuredemployers,astheyare not subject to state coverage mandates. They also have insight into the actual cost of care,administrativecosts,andanyloadedfeesoradditionalexpensestotheplan.Otherbenefitsofmovingtoself-insuranceincludethefollowing:n EscapetheHealthInsuranceIndustryTaxAnewtax imposedby theACA, theHealth Insurance IndustryTax (HIT) isdesigned to return to thefederal government some of the health insurance industry gains (increased enrollment and federalsubsidies) achieved from health care reform. In short, the total annual fee is $8 billion in 2014,increasing to $14.3 billion in 2018, and indexed to the growth of health care premium thereafter.Beginningin2014,mostplanswillloadthisfeeintotheinsuredplanpremiums.Healthplansestimatethefeetobeabout2%to2.5%inyearone, increasingto3%to4%infutureyears.Healthplansareliableforthepaymentofthisfee. It isnottaxdeductible,whichincreasesthecost impact,andmostimportantlyisnotapplicabletoself-insuredplans.For2016,theHITtaxissuspended.ItisunknowniftheHITtaxwillcontinueinsubsequentyears.n AvoidStatePremiumTaxesManystatesincludeapremiumtaxonhealthinsurersthatispassedalongtofully-insuredemployersintheformofhigherpremiums.Forexample,inTexasallfor-profithealthinsurersaresubjecttoa1.75%tax. The tax varies state to state,butonaverage ranges from1.5% to3%ofpremiums. Self-fundedemployersarenotsubjecttothesetaxesunderERISApreemption.n RetainandRedeployHealthPlanMarketingandRetentionFeesAll health insurers include expenses loaded in their fully-insured premiums for new business sales,marketing expenses, and retention of current customers. These costs can be as high as 2% to 4%depending on the carrier and do not exist in a self-funded environment other than a de minimisamountofcostbuiltintostoplossinsurance,ifthisisused.n ClarifyandControlAdministrativeCostsThecosttoadministerbenefits,payclaims,maintainanetworkandprovidefortheoveralloperationofthehealthplancanequal10%to12%ofinsuredpremiums.Whileself-fundedemployerswillincuradministrative expenses through payment to a carrier, third-party administrator (TPA) oradministrative services organization (ASO), they can control these expenses through multi-yearguarantees,transparentandunbundledagreements,marketingtheplanadministrationcontracteverythreetofiveyears,andidentifyingthemostcosteffectiveadministrativecarriersinthemarketplace.


n CaptureandInvestReservesSincethemoneyforclaimscomesfromtheoperatingincomeoftheemployer,aself-insuredemployercan capture investment income that is accrued on all funds allocated to the funding of insuranceclaims.Thisinterestcanbeusedtooffsetbenefitcostsoradministration.

n ReceiveaCashFlowAdvantageastheSelf-FundedPlanReachesMaturityFor employers moving from a fully-insured model to self-insurance, there will be a period of twomonthsorsobeforeclaimsmature.Thefully-insuredclaimsrunoutwillbecoveredbythepreviouscarrier. During this initial period, an employer should bank the excess cash to use for future claimliabilities.Incurredbutnotreport(IBNR)reservesneedtobecalculatedonaquarterlybasisorloadedintothepremiumtoaccountfortheIBNRclaimliability.

n EscapetheCostofStateandFederalMandatedBenefitsOverthepastseveralyears,stateshavebegunmandatingveryspecificemployerhealthcarebenefits.Eachstatehastheirownuniquelistofmandatedcoveragesthataddsignificantcoststoemployersandtheir employees. Self-insured employers can avoid the state mandate costs under the ERISApreemption, which allows greater flexibility in plan design. Also, under the ACA, employers arerequiredtoofferessentialhealthbenefits.Grandfatheredandself-insuredemployersareexemptfromtheseACArequirements.

n CapitalizeonSavingsfromPositiveExperienceFortheyearsinwhichhealthcareclaimcostsarebelowexpectations,employerscanaddthosesavingsdirectly to the bottom line of their profit and loss statement. With the passage of the ACA andproliferationof statehealthcaremandates,employersare focusedmore thaneveronways tocurbutilization costs. Methods include implementing tools such as consumer directed health care,increased cost sharing, claimprice transparency tools, specialtynetworks, value-basedplandesigns,andwellnessprograms.Self-fundingcanenhancethesestrategiesbyprovidinganemployerwithmoreleewayonhowtheydesignandfundsuchprograms.Additionalspendingonappropriatestrategiescangenerateanidentifiablereturnoninvestmentthatgoestotheemployerandnottheinsurer.

n CreateAdvisorFeeTransparencyManyinsuredemployersdonotunderstandthefullcostofanadvisorasthecommissionsareloadedin the fully-insured rates and often invisible to the employer. By self-insuring, employers see thebreakdownofcoststheiradvisorschargeandcanmanagethosecostsbyimplementingafee-basedorcommission-basedstructuretofittheemployer’sneeds.


n UnderstandPopulationHealthRiskandCostDriversAccess to claim information under a self-insured model, allows employers to begin to analyze thehealth conditions and high cost chronic disease states resident in their population. Based on thesefindings,targetedprogramscanbeimplementedtoimpactcosts.Obtainingdetailedclaiminformationina fully-insuredenvironment is challenging, ifnot impossible,becauseofprivacy concernsand thefactthatcarriersdonotconsiderthisdataemployerproperty.Alongwiththebenefitsofself-insuringthereareseveralissuesthatneedtobeclarified.Asemployerscontemplateaself-fundingoption,severalquestionsareraised:n Whataretheadditionalrisksofself-funding?n Howcanemployerscontroltheadditionalriskofself-funding?n Whatistheworst-casescenario?n Howdoesself-insuredaccountingwork?n Whatisstoplossinsuranceandhowdoesitwork?n Whatadditionalresponsibilitiesdoself-insuredemployershave?


RISKEXPLAINEDOf course, no one can predict the future with absolute certainty, but actuaries attempt to predictfutureriskandliabilitiesbyobservinghistoricalperformance.Theystartwithcurrenthealthcareclaimcosts thenmake certain assumptions, such as expected trend cost increases, claim fluctuation, plandesignadjustments,administrativefeesandcanthenprojectcostsforward.Actuaries can also conduct certain risk analyses such as a Monte Carlo simulation, which providesadditionaldataontheoddsoftheworst-casescenariosthatmayoccurandhelpsemployerssettheirretention levels.AMonteCarlosimulationmodels thousandsofscenariosusingrandomvariables toprovidethedecisionmakerwithaprobabilitydistributionofrisk.Itcanalsobevaluabletoanemployerconsidering self-funding as it provides a picture of risk. It is a tool that can predictwithin a certainconfidencelevel,thepossibilityandprobabilityoftheworst-casescenariothatmayoccur.SeeMonteCarloresultssummarychartbelow.

ExpectedClaimsSeverity

Thistablerepresents10,000claimsimulations.Expectedclaimsusedinthisexampleis$15.47million.In the top portion, we see that the likelihood of exceeding 2.5% of expected claims in year one is27.3%. As time elapses from one year to five years across the top and the “% of expected claims”increases from2.5% to25%down the left column,wesee the likelihoodofexceeding theexpectedclaims levelsdecreasesto lessthan0.1%. Inthe lowerportionofthetableweseetheprobabilityofachievinga5%or10%savings.Theprobablyofachievinglargesavingsdecreasesovertime.

%ofExpectedClaims

$AmountAnnually

Likelihoodofexceedingthislevelofexcessclaims

OneYear TwoYears ThreeYears FourYears FiveYears2.5% $387,000 27.3% 19.9% 14.7% 11.7% 9.2%5.0% $773,000 16.0% 8.4% 4.1% 2.3% 1.6%7.5% $1,160,000 8.3% 2.7% 0.9% 0.3% 0.1%10.0% $1,547,000 3.8% 0.7% 0.1% 0.1% <0.1%15.0% $2,320,000 0.6% 0.1% <0.1% <0.1% <0.1%20.0% $3,094,000 0.1% <0.1% <0.1% <0.1% <0.1%25.0% $3,867,000 <0.1% <0.1% <0.1% <0.1% <0.1%

%ofExpectedClaims

$AmountAnnually

Likelihoodofexceedingthislevelofsavings

5.0% ($773,000) 27.6% 19.6% 14.1% 10.8% 8.1%10.0% ($1,547,000) 7.4% 1.9% 0.4% 0.1% 0.0%


When an employer self-funds their health insurance, they assume all of the risk of medical claimsincurred by their employees.With this assumption of risk, comes themonth-to-month variance orfluctuation in claim costs. As employees receive health care services, these costs can changesubstantiallyfrommonthtomonth.Thehealthcaretrendchartillustratesthisexamplebelow.

TRENDMANAGEMENTExperience with many self-funded employers has shown that there are immediate cost savings.Overtime the cost savings can be substantial. The illustration above demonstrates this principle. Tobeginwith, the taxes,mandates,and feesmentionedpreviouslyareeliminated,as soonas the self-fundedmodelisimplemented,sotheemployerstartsatorbelowthefully-insuredstartingpoint.Theinitial savings increaseover timeas theemployer includes additional cost savings initiatives suchaswellness, consumer driven plans and splits out certain areas such as working with an independentprescriptiondrugvendor.

0

2000

4000

6000

8000

10000

12000

1 2 3 4 5 6 7 8 9 10

Annu

aMed

icalCostsl

Year

ClaimTrendOverTime

Fully-InsuredTrend

Self-InsuredTrend


MANAGEMENTOFRISK–STOPLOSSINSURANCEForanemployer thathasoutsourced the riskofhealth care claimcosts toan insurance carrier inafully-insuredmodel, themove to self-funding canbe a dauntingproposition. Thebiggest concern isthatofriskassumptionandexposuretolargelossclaims.Oneverysickindividualorasetofprematuretwinscanincurmillionsofdollarsinclaims,whichcouldbedevastatingtotheself-insuredplanandtheemployer’sbusiness.Stoplosscanminimizeoreliminatethisrisk.Typically,theemployercontractswithahealthplanorthirdpartyadministratortoadministertheplan.Often,theemployerandemployeescontributetoatrustandthetrustarrangestopurchasestoplosscoverage.Theriskassumedbythestoplossprogramisregulatedatthestatelevel.However,minimumretentionscanstartaslowas$5,000.Certainstateshaveminimumstoplosslevelssuchas$20,000-$30,000.AGGREGATESTOPLOSSToprotect themselves fromdramatic swings in claimcosts, a self-fundedemployer contractswithastop loss insurer tocaptheexposureofcatastrophic loss.Astop losscarrierprovidesprotection forthesecatastrophicclaimsbyprovidinginsurancetocovertheexposureoveracertaindollaramount.The coverage is purchased by employers and funds the risk of the program rather than insureemployers directly. These stop loss carriers issue policies thatwill paywhen either an individual oraggregate claim exceeds a pre-determined dollar level or attachment point to cover frequency andseverity risks. The attachment point is the level above which an excess amount of claims will becovered.

Forexample,anemployermaypurchaseanaggregate insurancepolicythatwouldcoverclaimsover125%ofexpectedcost.Tofurtherillustrate,let’sassumethatoneyearalargenumberofemployeesarehospitalizedwiththefluvirus.Ontopoftheseclaimsseveralemployeesweretravelingtogetherandexperiencedanaccidentthatrequiredhospitalization,surgeryandrehabilitation.

AggregateAttachment

PointExcessLossPays

ExpectedClaims

25%RiskCorridor Maxim

umClaim

sLiability


With these catastrophic events on top of the normal claims, the employer experiences 140% ofexpectedclaimcosts.Thestoplosscarrierwouldcovertheclaimsfrom125%to140%uptoacertainthreshold(typically$5million).SPECIFICSTOPLOSSSpecific insuranceworks ina similarmanner,but for individual claims.Goingback toourpreviouslymentionedexampleofpre-mature twins, let’sassumethat these twins incurcostsof$1millionand$1.5 million each. If the specific attachment point were set at $250,000, the employer would bereimbursedbythestoplosscarrier$750,000forthefirstinfantand$1.25millionforthesecondinfant.In the example below each bar represents a single individual. The light green bar is the employerliabilityandthedarkgreenistheinsurer’sresponsibility.

AGGREGATINGSPECIFICSTOPLOSSAnotherformofstoplossproductiscalledaggregatingspecificcoverage.Thistypeofcoverageisforemployerswhocanassumemorerisk,butwanttopayalowerpremium.Ifthespecificdeductibleis$50,000,therewouldbeaseconddeductible,forexample$100,000,anemployerwouldneedtomeetbeforethe insurerwouldpay.Oncetheseconddeductibleof$100,000wasmet fortheyear forthegroup,theinsurerwouldreimburseallindividualclaimsover$50,000.

LASERINGSomestoplosscarriersengageinapracticecalled,“lasering.”This isamethodofdecreasingriskforthestoplosscarrierbyexcludingfromcoveragespecifichigh-costindividualsfromthepopulationuponrenewal. To further our example of the twins, let’s assume that as the twins grow they have somecongenital physical defects that require significant medical care over time. As the claims continue,year-after-year, the stop loss carrier is required to increase thestop losspremium inorder tocovercosts. Tobring theoverall stop lospremiumdown, the stop loss carrierwill exclude the twins fromcoverage. The employer is now responsible for the full claim costs incurred by these twins, butcoverageremainsfortherestofthegroup.

SpecificDeductible

ExcessLossInsurerPays

EmployerPays


WHATISINAWORKINGRATE?The self-funded premiums are called working rates and are the equivalent of premiums under aninsuredmodel.Workingratesarenotpremiumsbecausepremiumconnotesthetransferofriskandinaself-fundedmodelthereisnotransferofriskunlessthestoplosscarrierisengagedtocovertheriskofthehighcostclaims.Workingratesaredevelopedannuallybyactuariesorunderwriterstoprovideacalculatedestimateoftheclaimsprojection,administrativefeesandotherplanexpensesanticipatedinduringtheplanyear.Theworkingratescontainthefollowingelements:n Medicalandprescriptionclaimsn Medicaltrendassumptionsn Administrativefeesn StopLosspremiumn Plandesignriskadjustmentsn Age/sexorriskadjustmentsn Claimfluctuationmarginn Otherplanexpenses(taxes,fees,etc.)Medicalandprescriptionclaimsarecoststhatareincurredascoveredparticipantsintheplanaccesscare.Thesecostsincreaseannuallywithtypicalmedicalandprescriptiondrugcostsincreasing7-10%.Medicalclaimscomprisethelargestportionofmedicalcosts-typicallyabout80-90%.Prescriptioncoststypicallycompriseabout10-20%oftotalmedicalcosts.ADMINISTRATIVEFEESAdministrative fees are paid to the third-party administrator, administrative service organization, orinsurancecompanythatmanagesthenetwork,adjudicateandpayclaims.Atypicaladministrativefeecancostanemployer$25to$75dollarsperemployeepermonth.Suchcostsaredependentonplandesigncomplexity,sizeofthegroup,andwhetherornototherservicesareloadedinsuchaswellness,diseasemanagement,vision,orotheradditionalbenefits.Traditionalinsurancecarriersusuallychargehigherfeesthanindependentthirdpartyadministrators.Typicallytheseadministrativefeesincrease2-4% per year and can be negotiated over multiple years. Larger groups have the most leverage insecuringmulti-yeararrangementsbecauseofthelargenumberofemployeesandparticipantsintheirpopulation.


STOPLOSSPREMIUMThestoplosspremiumisalsoincludedintheworkingratesandcantypicallyrangeanywherefrom$40foranindividualto$180forafamily.Higherstoplossattachmentlevelhavelowerrates.Thesestoploss premium costs increase at a much higher rate than underlyingmedical trends because of theleveragingeffectofthehighattachmentlevels.Increasesmaybeintherangeof15-20%dependingonthe size and experience of the group. The increases are often moderated by increasing stop lossattachment levels. Oftenstop losscarrierswillhaveacapon increases,as theyspread the riskoutovera largepoolof insuredparticipants.Carrierswiththesetypesofratecaps inplaceprotecttheircustomers from large rate swings and foster customer loyalty through good yearswhen claims arerunningwellandbadyears,whenclaimsarerunninghigh.PLANDESIGNFLEXIBILITYEmployers can modify their plan designs each year and their actuaries will adjust expected claimsbasedonthosemodifications.Forexample,ifanemployerincreasesanofficevisitcopayfrom$10to$25dollars,theimpacttoexpectedratescouldbeadecreaseofanywherefrom1%to3%dependingonthenumberofofficevisitsandexpectedofficevisitsintheupcomingplanyear.Actuariesusetablesandmodelstodetermineplanrelativitiesandthevalueofplandesignchangesovertime.Additionaladjustmentstoworkingratesmaybeimpactedbyfactorssuchasage,sex,orrisk.Eachyearas a population ages, the risk to the group increases. The highest risk groups are females inchildbearing ages, and older males. As females age out of childbearing years, their risk decreases.Converselyasmenage,theirhealthriskincreasessignificantly.Also,healthrisksinagivenpopulationcanbeused toadjust ratesupordown,assumingdata fromapopulationhealth riskassessmentorpopulationriskinformationisavailable.CLAIMSMARGINAnother useful tool that assists in managing year-to-year fluctuating claims is a claims fluctuationmargin.Aself-fundedemployermayuseanywherefrom3%to10%margintoincludeintherates.Thismargincanbeusedtocoverclaimsinyearswhenclaimsarehigh,ormaybeusedasareserveinyearsclaimsperformatorbelowexpectations.Dependingon thephilosophyof theemployer, themarginmaybeexcludedalltogetherfromtheratedevelopment.Someemployersmayfeelitisunnecessaryto includethismarginandthatthepricingshouldreflectthetruepriceoftheunderlyingclaimcostsandtrend.Lastly,working ratesmay include other taxes, fees, or expenses that are not classified as claims oradministration. With the passage of the ACA, employers may choose to add in the transitionalreinsurance tax and comparative effectiveness research fee. Below the two ACA fees/taxes aredescribedbelow.


ComparativeEffectivenessResearchFee TransitionalReinsuranceTax1

Purpose

Afeeassessedonspecifichealthinsurancepoliciesandemployersofferingapplicableself-insuredhealthplans.ThisfeegoestofundthePatient-CenteredOutcomesResearchInstitute(PCORI)whichwillengageinresearchtobeusedbypatients,clinicians,purchasersandpolicy-makers,tomakehealthdecisionsandadvancethequalityandrelevanceofevidence-basedmedicine.

Ataxassessedonhealthinsuranceissuersandthirdpartyadministratorsusedtofinancestaterunnonprofithigh-riskpoolreinsuranceentitiesforindividualswithpre-existingconditions.

KeyElements

n PayableJuly2013n $1PMPYinyearone;$2inyeartwon Indexedto2019n Insured:Carriersareresponsible(IRS

Form720)n ASO:Employersareresponsible(IRS

Form720)

n Payable2014–2016n Estimatedperparticipantfee:

l 2014:$63($12B)l 2015:$40-$60($8B)l 2016:$25-$35($5B)

n 1stpaymentJan1,2015n Insured:Builtinn ASO:Employersareresponsible

The working rate is a proxy for premiums and provides a self-funded employer the flexibility tomanagecostsandcontributionseffectivelyovertime.1. The Transitional Reinsurance Tax is under review. Current proposals minimize this tax to 2014 only.


OTHERCONSIDERATIONSFOREMPLOYERSUSINGCAPTIVESTOMINIMIZEHEALTHCARECOSTSMid-sizeandlargeemployersmaywanttoself-fundstoplosscoverageratherthanpayapremiumtoanoutside insurance carrier for additional savings. There are alternative funding vehicles, such as acaptiveinsuranceentity,thatcanbecreatedtoholdstoplossandothertypesofbenefitandbusinessrisks.Acaptive isan insuranceorreinsurancecompany,specificallyestablishedto insureorreinsurethe risks of its parent or associated third parties. These captives can generate savings of anywherefrom5%to10%.Thereareseveraltypesofcaptivesdesignedtomeetdifferentneeds.Afewoftheminclude:

TypeofCaptive Ownership Purpose

SingleParent(Pure)Captive SingleEmployer Costsavingsandinvestmentretention

GroupCaptive GroupMembersPoolriskanddecreasethecostofstoplosswitha

captive

RiskRetentionGroups GroupMembers

Designedtoholdandmanagetheriskofseveralentitiesfor

theemployer’sliabilityassociatedwithhealthcareandcanwritebusinessin

multiplestates.

AssociationCaptives Association Createdfortheuseoflikeemployers

AgencyCaptive Broker Establishedbybrokersonbehalfoftheirclients

Rent-a-captiveorcellfacilities OwnedbyasponsororsponsorsAllowsemployersorgroupsofemployerstohavecaptivebenefitswithoutacaptive

Forabenefitcaptive,thestoplosspremiumsandriskareheldandmanagedbythecaptiveprogramandpaidoutascatastrophicclaimsare incurred. Inthetablebelow,weseethatpremiumsarepaidintothecaptiveandsegregatedintolossfunds–heldtoreimburselosesastheyoccur,operatingcosts–thatreimbursethecaptivemanager,andreinsurancepremiumsforaggregateprotection.


As catastrophic claims are incurred, the claim amounts below the deductible are paid out fromcorporateoperatingfunds.Claimamountsoverthedeductiblearethenreimbursedbythecaptiveuptoacertain threshold.Once theexpected loss thresholdhasbeenmet theadditionalportionof theclaimarecoveredbythelossfundsretainedbythecaptive.Intheeventtheaggregateclaimsexceedexpectationsreinsurancecoverstheexcess.

CaptiveStopLossPremium

ClaimsPaidbyStopLossReinsurer

ClaimsPaidbyCaptiveinExcessofExpectedCoveredbyCaptiveRiskMargin

ExpectedLossesPaidbyCaptive

SelfInsuredClaims RetainedbyBusiness

A captive can assume risk on a fronted or direct basis. A fronted arrangement is where an insurerstands “in front” of the captive to provide administrative simplicity and compliance. Their fee addssomecostandisusuallyapercentageoftheoverallpremiums.


BENEFITSOFACAPTIVEAswellasthesavings,oneofthebiggestadvantagestoestablishingacaptiveisthatalloftheprofitandcontrolremainundertheemployer’soversight.Furthermore,astoplosscaptiveisnotsubjecttoERISAandavoids the ERISA “ProhibitedTransaction”orMEWAclassification.Other advantagesof acaptivearelistedinthegraphicbelow.

In short, a captive can be a valuable tool for employers of virtually any size as it allows totaltransparencyofcost,accesstoclaimsdata,assetgrowthandretention,andadecrease in insurancecoststhatwouldnormallybepaidtotheinsurer.Employersthatimplementcaptiveshouldrememberthatthecostsavingsopportunitieswillnotbeincurredimmediately,butareachievedovertime.CASHFLOWAs claims fluctuatemonth-to-month, the employer covers the costs of claims typically on aweeklybasis.Theadministratorwilldrawdownfundsoutofabankaccountfundedbytheemployer.Forthehighdollarclaimsthatgotostoplosscoverage,therecanbeadelayonreimbursementsbacktotheemployerwhile theclaim isprocessed,eligibilityverified,andproofofcoverage issuesare resolved.Thiscantaxemployercashflows.

CostManagement•  Acceleratecashflowthroughpremiums,claimsandreserves•  Reducefricronalcosts(commissions,taxes,riskcharges,

administraron)•  Captureinvestmentreturn•  Improvecashflowandcentralizeinvestmentofreserves

IncreaseControl•  Designcoverageandprovisionsofbenefits•  Improvedatamanagementandclaimcostmanagement•  Removeinsurer’sprofitloading•  ImprovemanagementreporrngandunderstandingofrisksImproveRiskManagement•  Operateandmanageacentralriskpool•  Implementappropriatestoplossreinsurancetomanagepeakrisks•  Reducetheoverallcostofrisk


COMPLIANCEAself-fundedemployerneedstobeawareof thecompliance issuesrelatedtoself-funding includingtherequirementtofileaform5500andrelatedschedules,complywiththeMentalHealthParityActandadditionallawsandrequirementsofERISA,andmostimportantlythenewrequirementsundertheACA that apply equally to fully-funded and self-insured plans. All of these new issues andadministrative tasks shouldbe identifiedandaddressedbeforeorduring the implementationof theself-fundedplan soas topreventany surprises. For captives, statedomicile insurance lawsapplyaswell.FIDUCIARYRESPONSIBILITYUnderaself-insuredmodel, theemployernowbearsthesoleresponsibilitytoultimatelyapproveordenyclaims.Thisincludesclaimsthathavebeenappealed.Thisresponsibility,however,canandshouldbe outsourced to the TPA, ASO, or insurance company paying the claims. This may prevent theemployer frombeing exposed to lawsuits or falling into the trap of becoming the requiredmedicalrevieweronallappealedclaims.Iftheemployerstartstomakeexceptionsandapprovesomeclaims,but not others, it could open them up to claims that they arbitrarily and capriciously cover certainappealed claims, an explicit violation of a fiduciary’s duties. By outsourcing this function to theadministrator,theseliabilitiesmaybeavoided.HIPAAAnotherareaofsignificantliabilityforself-insuredemployershastodowiththereceipt,storageandtransmittal of protected health information (PHI). A self-insured employer has access to claimsinformationthatcanbeidentifiabledowntotheindividualemployeeanddependentlevel.Accesstothis information must be controlled, limited and monitored under strict policies and proceduresoutlined in the HIPAA regulations. Release of such information, both accidental and purposely, aresubjecttofinesandpenaltiesunderthelaw.Employersarewelladvisedtofamiliarizethemselveswiththese regulations and make the appropriate adjustments in their policies and procedure to fullycomply.


CONCLUSIONAsanemployerbeginstoconsidertheprosandconsofself-funding,therearemanyissuestoconsider.For an employer that uses a fully-insured model, a change to self-funding requires changes toaccounting,banking,andadministrativeprocesses. Italso requiresexpertise thatmaynotbe readilyavailablein-house,suchasactuarialsupport,consultingadvice,vendormonitoring,anddataanalysis.Alloftheseserviceswillrequireadditionalexpense,butthesavingsandbenefitsofself-funding,someimmediateandotherslong-term,faroutwaythecostoftheseservices.Onceanemployerhasmadetheconversiontoself-funding,theycanachievesavingsofanywherefrom5%to15%dependingontheircoststructure.Self-insuranceremainsapowerfulweaponinthewaronburgeoningbenefitcosts.Employerswhomakethechangecanreapimmediatebenefitsandavoid,oratleastslowdown,someofthesignificantandinevitablecostincreasesonthehorizon.Our Consulting Team ismade up of a number of highly trained risk funding professionals.We helpemployersnavigatetheself-fundingwatersandhelpthemdevelopthebestfundingstrategytomeettheirindividualneedsPleasecontactus ([email protected]) ifour teamcanbeofassistance toyourcompanyor ifyouhaveanyadditionalself-fundingquestionsthatwecanhelpanswer.


ABOUTSPRINGSpring,providesafullrangeofstrategicconsultingservicestoinstitutionsintheinsuranceandfinancialservicesindustry;broadconsultingandbrokeragecapabilitiestoemployers;andfundingsolutionsforbenefit programs, including the use of captive insurance facilities and the day-to-daymanagementthereof.Springwas formed inMarch2004, throughamanagementbuyoutof theUS insuranceand financialservicesstrategyconsultingpracticeofWatsonWyatt,LLP. OURUNIQUEEXPERTISE Inadditiontodesigningthe firstemployeebenefitcaptive in theU.S.,Springhasworkedwithmanylargesizeemployersandfinancialorganizationstodesignbothinsuredandself-insuredprogramsandimplementinnovativecaptiveinsurancecompanyprograms.TheSpringteambelievesthatasthecostsofbenefitsarerising,acaptive,ifmanagedcorrectly,canreducebenefitcostsandprovidebudgetarystability.Moreover,recentlegislativedevelopmentsintheU.S.arechangingthemarketdynamicsandarerapidlyevolvingtowardsmoreeffectivefundingofemployeebenefitsincaptives.Spring brings our clients unmatched expertise in the area of employee benefits design, alternativefundingandcaptivemanagement.TheSpringteamhasbeenprovidingafullrangeofemployeebenefitand captive program administration services, including underwriting, pricing, reserving, claimsprocessing,financialmanagementandadministrativeservicestoemployeebenefitscaptivesformorethan10years.Tohelpensurethesuccessofourconsultingengagements,Springhasunder itsroofafullarsenalofresources,toolsandstrengthstobenefitourclients.Theseinclude:n Captive Specialists. We have expertise in developing captive insurance strategies in employee

benefits for our clients that seek cutting edge alternative risk financing solutions. With ourprecedent-settingcaptivestrategies,wehavehelpedshapetheemployeebenefitscaptiveworldintheUnitedStatesasweknowittoday

n RecognizedExperts.Youwantthebestinthebusiness—peoplewhohaveworkedwithFORTUNE500tosmallbusinessclientstosolveproblemscreatively.Ourconsultantsarerecognizedleadersinthe design and funding of captive insurance solutions, and can bring to bear their collectiveknowledge,insightandindustryconnectionsforthisproject


n Strategic Solutions. You need answers that will be long-term solutions — ones that take intoaccount not just the problem of today, but to anticipate and plan for the challenges yourorganizationwillfacetomorrow

n Effective Teamwork. You need a committed, proactive team with the ability and resources todeliverservice.Youwantexpertswhocantransfertheirknowledgeofcomplexissuestotheyourteameasilyandeffectively

n Predictability.Youneedstraightforwardadvicetailoredtoyourspecificbusinessissues.Youwantnosurprisesinbothourworkingrelationshipandtheresultsweprovideyou

n Focus on Business Objectives. You need a team who understands your business well and isdedicated to delivering services that add value to your business— a firm that understands thecomplexities of issues ranging from financial forecasting to actuarial funding and its impact onshort-andlong-termbudgetandfinancialplans

What’sNext? Spring is a recognized leader in risk funding strategy. There is no other firm out there that is asdedicatedandflexibleindeterminingifself-fundingistherightfitforyouandthenprovidingyouwiththerightsolutionfromdevelopmentthroughimplementation.If self-funding seems like something that may benefit your company, the next step is discussing afeasibilitystudycontactourteamforadditionalinformationabouthowtobegintheprocess. CONTACTINFORMATION SpringConsultingGroupLLC30FederalStreet,4thFloor,Boston,MA02110Phone:(617)589-0930;Fax:(617)[email protected]:spring-consulting-group-llcTwitter:@SpringsInsightYouTube:SpringConsultingGroupSlideShare:SpringConsultingGroup

self-funding and the management of risk · 2017-01-07 · n avoid state premium taxes many states...

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